Feature

Contracts with America

Private companies reap profits from federal contracts

By Michael Scherer

Jeffrey Jones knows how to fuel a war. As the director of the Pentagon's Defense Energy Support Center, he traveled the Persian Gulf in the months before Operation Iraqi Freedom to connect with suppliers for the U.S. military's ships, tanks and planes. When U.S. forces invaded Iraq, he used several hundred federal employees to keep the fuel lines running to troops in dozens of countries. "We go direct," says Jones. "We have no one in between."

So Jones was surprised last year when the Defense Department passed over his agency and awarded a contract—behind closed doors and without any competitive bidding—to a subsidiary of Halliburton, the construction and oil services company where Vice President Dick Cheney formerly served as president and chief executive officer. "I can't invite myself," Jones told colleagues. Although Halliburton had little experience buying fuel, it did have a broad logistical support contract with the Pentagon that Cheney, as secretary of Defense in 1991, had asked Halliburton to design. "Only the contractor that developed these complex plans," stated a Pentagon briefing document last year, "could commence implementing them on extremely short notice."

Indeed, outsourcing fuel buying is in keeping with the growing trend toward turning government work over to the private sector. Over the past four decades, the federal government has shifted so many of its responsibilities to contractors that it now depends on private companies to draw up, award and monitor the contracts for services that range from the highly specialized—managing the space shuttle—to such basic tasks as processing disability claims, hiring security guards, and managing public housing. From 1999 to 2002, the government eliminated 46,000 civil-servant jobs while adding an estimated 730,000 contract positions; President Bush has proposed letting businesses do the work of another 850,000 federal positions—about half the remaining civil service. It's the culmination of a distinctly American notion that government can never do anything as well as business. As Mitchell E. Daniels, Jr., Bush's first budget director, remarked, "The general idea, that the business of government is not to provide services but to see that services are provided, seems self-evident to me."

But Halliburton didn't do a better job than Jones and his agency would have. The military soon was paying $2.64 for a gallon of gas, double the price that Jones says he would have paid. Although Halliburton subcontracted much of the work to Kuwaiti buyers with minimal competition, it still earned as much as $100 million from the deal. A Pentagon audit has reported that Halliburton may have overcharged taxpayers about $61 million, prompting the Justice Department to open a criminal investigation.

It's tempting to view the Halliburton boondoggle as an example of one well-connected company reaping millions of dollars at taxpayer expense. But the problem is far more endemic than that: The federal oversight of contracts, not only in the Pentagon, but across the government, has been eviscerated. While the amount spent on federal contracts during the '90s increased, the government eliminated nearly half the federal employees who served as buyers, auditors and contract managers, including 230,000 such workers at the Defense Department alone. At the same time, the government's procurement and contracting rules were changed, removing many of the oversight requirements. "The rules and the way they were changed allow you to do almost anything," says Angela Styles, Bush's former chief of procurement policy. "People shouldn't be shocked."

Jeffrey Jones retired to Florida in October after 30 years as a civil servant. At that time, he thought his work had been vindicated as officials had asked his Pentagon colleagues to take over the fuel-buying job that Halliburton had botched. But Jones still worries about the government's rush to get rid of public employees. The Defense Department is now studying plans to outsource the work done by his old agency. "There is a let's-give-away-the-govemment-as-fast-as-we-can attitude," he says. "It's not based on logic. There is a presumption that you can't do it as well as the private sector." Jones is dismayed that the administration hasn't learned from the Halliburton affair that some government functions should not be farmed out.

"You are giving up the ability," he says, "to know whether it is done right."

"An Absurd Arrangement"

Profiteering from federal work is now in the spotlight because of allegations about Halliburton's abuses in Iraq. In addition to the questions about the fuel contract, federal auditors have found that the company overcharged for troop meals and that its employees took kickbacks in Iraq. Yet even before the invasion, alarm bells about the government's contracting out work had begun to sound. In December 2002, Comptroller General David Walker said that he was "not confident that agencies have the ability to effectively manage cost, quality and performance in contracts." He called the current challenges to contract oversight "unprecedented," pointing to reports by his agency, the General Accounting Office (GAO), that taken together present a disturbing picture: The findings show a "high risk" for abuse or fraud in more than a dozen programs—in agencies ranging from the Forest Service to the Internal Revenue Service—that comprise a majority of federal spending.

Walker is not alone in his concerns. Federal auditors have issued a host of reports documenting hundreds of millions of dollars of waste because of the absence of contract oversight. And critics say that they have discovered only the tip of the iceberg as there are simply too few auditors to investigate all the contracts. In December 2001, E.C. "Pete" Aldridge Jr., then the Pentagon's top acquisition officer, warned, "A reassessment may very well show we have already contracted out capabilities to the private sector that are essential to our mission." But no sweeping reassessment has occurred, and problems with contracting are now surfacing across the federal landscape.

"The politicians pretend there is no problem," says Daniel Guttman, a fellow at Johns Hopkins University who studies federal oversight, "while those who actually do the observing say the emperor is naked."

In 2000, for instance, Congress asked the Energy Department to establish a system for paying compensation to workers who became ill from their employment at U.S. nuclear-weapons labs. Energy officials used a loophole to contract out the project without any bidding to Science and Engineering Associates (SEA), a database management firm in New Orleans, which had no experience in health-claims processing. By late last year the company had processed claims for only 81 of the 20,000 applicants. Meanwhile, a tandem program being run directly by Labor Department employees had processed 94 percent of its nearly 36,000 cases. Some senators, disturbed by the plight of ill workers, tried unsuccessfully to put the Labor Department in charge of the entire program. But after lobbyists for the Louisiana firm cautioned that the state could not afford to lose jobs, Congress left the contract with SEA. The baffled Energy Department hired another consulting firm to help SEA fix its mistakes.

In 2002, the Transportation Safety Administration needed to recruit, train and oversee about 65,000 airport screeners after Congress, following the 9-11 attacks, decided that such workers should be federal employees. At the time, the agency had only 18 employees. So even in one of the few projects that is bringing new workers into the federal fold, the agency had little choice but to contract the hiring to the American subsidiary of a British firm, Pearson PLC. To speed the process, the project was designed without a fixed price. Costs ballooned to $700 million from an initial $100 million estimate.

At the Department of Housing and Urban Development, spending on outsourced work increased from $786 million to almost $1.3 billion between 1997 and 2000, while the department cut the number of workers overseeing programs. What's more, a GAO report in 2002 revealed that nine of every 10 HUD contract and procurement workers had not met federal training requirements and that HUD lacked a comprehensive oversight system for contracts. The agency repeatedly paid for work that was not done, auditors reported.

The list goes on. The Internal Revenue Service's oversight of contractors was faulted in 2002 when a contractor shredded or misplaced 70,000 taxpayer checks worth $1.2 billion. Last August, six months after the Space Shuttle Columbia exploded during re-entry, NASA officials pointed the finger at the shuttle's contractors, who were in charge of monitoring the mission.

"We must rely on our contractor workforce," said Linda Ham, a NASA mission manager. "We don't have the knowledge to do that." And recently, Secretary of Defense Donald Rumsfeld handed the management and oversight of the "Star Wars" missile defense system to the contractors who are building the system.

"The Pentagon has created a system where contractors are evaluating themselves and then making recommendations on how much more money they need," says Sen. Jack Reed (D-R.I.), a member of the Senate Armed Services Committee. "It is an absurd arrangement."

Accountability: Who Needs It?

Such "absurd" arrangements are not isolated incidents, but the result of recent laws that dictate the way the federal government should contract out work. Even as President Bush has declared his intent to "open government to the discipline of competition," federal policy has been moving steadily in the opposite direction. Many types of contracts that were awarded through open competition during the '80s now barely see the light of day. Federal buyers increasingly rely on esoteric contracting vehicles such as open-ended umbrella contracts, which allow companies like Halliburton to subcontract federal projects to other businesses with minimal oversight. "Openness, fairness, economy and accountability have been replaced as guiding principles by speed and ease of contracting," said Judge Steven Daniels, a Republican who hears contract disputes for the General Services Administration. "Full and open competition has become a slogan, not a standard."

An analysis of federal contract data provided by Eagle Eye Publishers, a market research firm that tracks government spending, produced sobering results. Total federal contract dollars increased by more than a third between 1996 and 2002, up from $186 to $265 billion. Nearly 52 percent of the contract dollars in 2002—almost $138 billion—was awarded without competition, attracted only one bidder, or used multiple-award contracts or federal purchase cards-practices that auditors say are being used to skirt competition. That's a substantial increase from 1996, when such contracts comprised less than 41 percent of federal contract spending.

This shift occurred at the same time that policymakers began to relax government oversight of contracts and turn over more federal work to contractors, a scenario officials once cautioned against. In 1962, President John F. Kennedy's budget director, David Bell, had warned that the government's growing dependence on contractors threatened the ability of the United States to run itself. "There are primary functions of management which cannot be transferred to any contractor," Bell wrote, "if we are to have proper accountability for the performance of public functions and for the use of public funds."

This was not just a Democratic perspective. In 1966, a young Republican representative from Illinois railed on the House floor against an open-ended contract that President Lyndon B. Johnson's administration had awarded to a Halliburton subsidiary for base construction in Vietnam. "It is beyond me [why that contract] has not been and is not now being adequately audited," the congressman said. "The potential for waste and profiteering under such a contract is substantial." That congressman was Donald Rumsfeld, who today, as secretary of Defense, supports the very same types of contracts he once decried.

The government's embrace of contractors grew tighter as the Cold War wore on. Ronald Reagan rose to prominence on an antigovernment platform and, once in office, tried to cut roughly one-sixth of the federal payroll through contracting. In the '90s, congressional Republicans called for the government to turn social service programs over to the states and proposed eliminating a number of federal agencies entirely.

While the Clinton administration opposed the most severe cuts that the Republicans proposed, it agreed that government needed to be more efficient and supported revisions in the way that contracts were awarded and overseen. It backed a measure allowing contracts to be considered competitive even if they attracted only one bidder, supported the creation of new categories of "commercial" products that didn't have to be bid on competitively, and expanded the use of government-wide contracts, so agencies could award work to companies working elsewhere in government without opening the new projects to competitive bids. The emphasis shifted from policing contractors to eliminating burdensome red tape that required government buyers to write specifications for everything from ketchup to soldiers' underwear.

The changes in contracting that the Clinton administration pioneered opened an acrimonious debate among federal contract experts, pitting watchdogs and auditors against the industry and government buyers who favored the new policies. "What you are talking about is a government at war with itself," says Christopher Yukins, a law professor at George Washington University.

As the rules made it easier to award contracts, new abuses were discovered. A General Services Administration report, for instance, notes that when the Navy needed rubber barriers for its harbors in 2001, it awarded the contract, without soliciting bids, to a company that had never manufactured, let alone purchased, a single one. Its selection of Northern NEF, an information technology firm, appeared to be legal, as the firm was listed in a government-wide catalog because of its work maintaining the computers of the U.S. Air Force. Northern NEF subcontracted the whole $53 million job, again without competition, collecting a $2.6 million fee for its services as the middleman.

"That company earned several million dollars for doing nothing but pushing paper," says Eugene Waszily, an assistant inspector general at the General Services Administration.

Eliminating the Competition

As President Bush's First Chief of Procurement policy at the Office of Management and Budget, Angela Styles aimed to fix these abuses in the contracting system. As a government contract lawyer at a private firm, she had watched warily from the sidelines as the Clinton administration eliminated competitive requirements and oversight. She was particularly concerned with the rise of government-wide contracts like the ones used by the Navy to acquire barriers and the Department of Energy to handle medical claims. "You start eliminating competition, and you are creating monopolies," she said recently in an interview. "You can't be getting the best rate for taxpayers."

But Styles didn't get very far. Less than a year after taking office, government contractors and those who represent them were calling for her head. Larry Allen, Vice President of the Coalition for Government Procurement, a contractor trade group, warned that Styles was trying to "completely dismantle the hard-fought reforms that make government acquisition the great management success story it currently is."

Steven Kelman, a Harvard professor who helped to develop the Clinton administration contracting policies, dismissed Styles as a member of the "professional scandal community"—one of the lawyers who profit from litigating over burdensome rules. (Kelman himself registered as a lobbyist in 2001 to push for loosening the oversight of contracts even further.)

The most serious challenge to Styles came from Rep. Tom Davis (R.-Va.), the Chairman of the House Government Reform Committee. He represents a district in northern Virginia, home to many of the largest federal contractors. Before being elected to Congress, Davis had worked as an executive at PRC Inc., a military technology contractor, a fact he often repeats in public statements. After leading campaign fundraising efforts for House Republicans in 2002, Davis promptly elevated the concerns of corporate contractors to the top of the agenda. He pushed legislation to ease oversight rules, expanding, among other things, the exemption from holding open competitions for many services. Davis' staff held "drafting summits" with contractors to produce the bill. Leaked drafts of the legislation revealed that trade groups had suggested specific sections.

Styles, along with auditors at the Defense Department and the GAO, opposed much in Davis' legislation. And Davis was soon working to undermine her. He wrote letters to Styles' bosses at the Office of Management and Budget, Mitchell E. Daniels Jr. and Joshua Bolten, asking them to rein in Styles and frustrate her efforts. Styles said that she could not counter the contracting lobby and found few powerful allies within the Republican Party on her side.

"The fiscal conservatives, for reasons I don't completely understand, are not part of that," she said. "We compromised." The bill, which included a small increase in training funds for federal contracting officers, ultimately passed Congress and was signed by the president. Davis is now working with contractors on the next round of "reforms."

Styles resigned in September, after two years in the job, and returned to practicing federal contract law at the firm Miller & Chevalier in Washington, D.C. David Safavian, the Chief of Staff at the General Services Administration, has been nominated as her replacement. Safavian is a former Republican congressional aide and the founder of a lobbying firm with conservative activist Grover Norquist. Though he has relatively little experience with contract law, his wife, Jennifer, happens to be a high-ranking congressional staff lawyer—for Rep. Tom Davis.

Whatever the Price, the Price is Right

The results of contracting "reforms" can be seen in Iraq. Recently, the Defense Contract Auditing Agency added $22 billion in Iraq reconstruction audits to its portfolio without hiring a single new auditor. Instead, the agency says it began a study on contracting out its own auditing functions.

At another Pentagon unit, the Defense Contract Management Agency, a decrease in staffing has forced workers to cut oversight and focus on those contracts deemed to have "significant risk" for abuse.

Since the beginning of the war in Iraq, dozens of buyers employed by Halliburton have been hunkered down at a vacation resort in Kuwait, working 12- to 16-hour days spending federal dollars. In a single day, one contract buyer might send through as many as 80 orders for everything from office supplies to bug spray. Rep. Davis sees this moment as a great opportunity for government contractors. "Right now, Baghdad and Iraq are front and center," he told a group of corporate executives last fall. "And we hope you can be a part of it. And if you make a profit along the way, all the better."

But Henry Bunting, a Texan who has worked for several companies as a procurement officer, says that the contractors' opportunity is a rip-off of taxpayers. Bunting, a registered Republican, worked for 15 weeks in Kuwait as a Halliburton buyer before quitting in August, disillusioned and exhausted. At a hearing organized by Democratic members of Congress in February, Bunting testified, "There was no concern over price." This worried many of the buyers there. "A lot of them thought that we were wasting a lot of money," he explained.

Bunting said that the waste was far greater than even the wartime conditions and need for speed required. Even when free market competition was available, he noted, supervisors told him to use a preferred list of suppliers for purchases. He points to the structure of Halliburton's umbrella contract, which was drafted before the war began and offers little incentive to keep costs down; in fact, the more Halliburton spends, the greater its profit.

"The comment by both Halliburton buyers and management was, ’It's cost-plus—don't waste your time finding another supplier,'" Bunting said. He held up a bright yellow towel that Halliburton contractors had purchased for troop recreation facilities in Baghdad. Instead of ordering basic towels for the troops, Halliburton buyers had decided to buy a higher quality towel, embossed with the logo of the Halliburton subsidiary doing the work. Company officials say the logos were needed to prevent towel theft.

Senators expressed disbelief. "This is just a culture in which a company can actually profit by being not just inefficient but by padding costs?" Sen. Byron Dorgan (D-N.D.) asked.

"Yes, absolutely," Bunting said.

In a report made public in March, Pentagon auditors said that Halliburton had been violating federal acquisition rules, had significant cost-accounting deficiencies, and had recently overpriced one job by as much as $700 million. The auditors asked federal officials in January to notify the audit agency before awarding any new contracts to Halliburton. But auditors received no notice three days later when the company was awarded another $1.2 billion Pentagon contract.

Of course, the problem goes beyond Halliburton. Fluor Federal Systems, Perini Corp., and Washington Group International were also cited in the same report for the way they handled work costs, subcontracting and competition as part of a $900 million contract to restore electricity in Iraq.

Indeed, problems could be seen in the Bush administration's first contract for work on the reconstruction of Iraq, which was handed to a company without any competitive bidding. The $27 million deal was awarded by the U.S. Agency for International Development (USAID) to a Beltway consulting firm, International Resources Group, to help plan, draw-up and manage the billions of dollars in reconstruction contracts to follow. Several months later, the agency hired another Beltway firm, Management Systems International, to keep tabs on the work of the first contractor.

USAID simply could not handle the job by itself. Congress had cut its staff by nearly a third during the '90s, even as it nearly doubled the number of countries where the agency was operating programs. In the Iraq effort, USAID reported it placed contractors in jobs that it considers "inherently governmental"—jobs that required setting policy, overseeing other contractors and interpreting laws. When GAO investigators visited USAID's Baghdad headquarters in September, they found only 16 government employees—and more than 60 contract workers—overseeing the largest reconstruction project since the Marshall Plan. Warning that the agency lacked adequate federal staffing, the investigators wrote, "The agency is finding it increasingly difficult to manage the delivery of foreign assistance."

Nobody Watching the Store

In a different era, contracting abuses like those discovered so far in Iraq would have sparked formal congressional investigations. At the start of World War II, Sen. Harry Truman, a Missouri Democrat, established a bipartisan panel of lawmakers to probe allegations of war profiteering by American corporations. The scandals he uncovered embarrassed many in his own party, including President Franklin D. Roosevelt. But Truman's panel is now remembered as one of the most successful investigative bodies in American history, credited with saving billions of dollars. Truman exposed price-fixing in the aluminum industry, cronyism in contract awards and faked inspections of military steel. It so raised Truman's profile that Roosevelt chose Truman as his running mate three years later.

But don't expect any high-profile congressional investigations into the growing number of allegations of contract abuses in Iraq, Afghanistan and the war on terror. The Republicans who control both houses of Congress have so far rebuffed calls for extensive hearings. Congress has failed to act even as the Kuwaiti Parliament has launched its own investigation and even as a leaked internal investigation from Halliburton declared that the company's own cost controls in Iraq were "antiquated" and "weak."

In March, Army officials said that they may open portions of Halliburton's logistical support contract to other bidders. That same month, under increasing pressure, Rep. Tom Davis announced that he would hold two half-day hearings. But he appeared to be working closely with Pentagon leaders to dismiss suggestions that the troubles in Iraq revealed problems in the contracting system. "I just want to put all this in the appropriate framework," Davis says. "This is a war zone and things go on."

Neither Davis nor any other Republican member of Congress attended the Democrat-sponsored hearing in February to listen to Bunting, the former Halliburton procurement officer, or the witness that followed: Jeffrey Jones, the Pentagon's former head of fuel support. After the revelations about Halliburton's fuel prices in Iraq, Jones had interrupted his retirement to fly to Washington, D.C., at his own expense to defend the merits of leaving federal employees in charge of federal work.

Jones told lawmakers that when he learned the prices that Halliburton had paid for fuel, he thought, based on his personal experience, that the company was paying too much.

"At the time we first heard this, being inside the government and knowing how difficult contracting can be, I presumed that there were cost elements that I just didn't know about," he said. "But the more I find out, the more my basic instincts were right. This situation was just out of control. There was nobody watching the store."

Michael Scherer is a freelance writer whose work appears regularly in The Nation and Mother Jones.